1-16-2020 DOL Joint Employer Rule Changes
The Department of Labor published its final rule that is supposed to clarify issues surrounding joint employment for the Fair Labor Standards Act (FLSA). As this rule change is from the Trump administration, it is touted as being business friendly. The following types of employers are primarily affected:
- Those who use staffing agencies;
- Those who have franchise relationships;
- Those who use subcontractors; and
- Those who have more than one company which share employees.
The FLSA requires that non-exempt employees be paid overtime for any hours worked over 40 hours in a workweek. If two or more employers jointly employ a worker, it is harder to ensure that the employee is paid their proper wages, and they are to receive overtime for all combined hours worked over 40 in one workweek. Also, if there is a joint employment relationship, each employer can be held liable for the full amount of the wages owed to the employee.
NEW RULE CONTENT
There are two different joint employment situations addressed by the final rule:
1. Work for one Employer that also benefits another Employer (which may include staffing agreements and loaned employees). The rule states that another entity is the employee’s joint employer ONLY if that entity is acting directly or indirectly in the interest of the employer. Under this circumstance the DOL has set forth a 4-part balancing test to determine whether a joint employment relationship exists. The test looks at whether the potential joint employer:
- Hires or fires the employee;
- Actually exercise, directly or indirectly, the employee’s work schedule or conditions of employment to a substantial degree (merely having the right, but not exercising it does not, by itself, make a joint employer);
- Determines the employee’s rate and method of payment; and
- Maintains the employee’s employment records (by itself does not demonstrate joint employer status – because control over the employee must be shown).
One subpart does not rule over the others, and there is no requirement for all of the criteria to be met. The rule says that each case is reviewed on an individual basis, examining the specific facts of the case. Other factors showing the exercise of significant control over the terms and conditions of the employee’s work may be considered as well – other than these factors, which are exempted by the rule as showing control:
- The economic dependence of the employee on the potential joint employer:
- Special skills
- Investment in equipment or materials for the job or employment of helpers
- Opportunity for profit and loss
- The number of other contractual relationships the employer has entered into to receive similar services.
- Whether the company has certain business models, such as a franchise agreement or a brand and supply agreement.
- The presence of certain contractual agreements the potential joint employer has with the other employer that would require the employer to meet legal obligations or standards to protect the health or safety of its employees or the general public, or to protect the quality of the work product or business reputation.
- Whether the potential joint employer has a practice of providing the employer with a sample employee handbook, or other forms, allowing the employer to operate a business on its premises (including “store within a store” arrangements), offering an association health plan or association retirement plan to the employer or participating in such a plan with the employer, jointly participating in an apprenticeship program with the employer, or similar business practices.
2. Where multiple Employers suffer, permit or otherwise employ the employee to work separate sets of hours in the same workweek, if the employers are sufficiently associated with respect to the employment of the employee. (Which may include companies with common ownership). In this case the employers must combine the hours worked for each in order to determine if they are paying the employee properly. The new rule uses the following factors to determine whether employers are sufficiently associated:
- If there is an arrangement between them to both use the service provided by the employee,
- The employer is acting directly or indirectly in the interest of the other employer in relation to the employee, or
- They share control of the employee, directly or indirectly, because one employer controls, is controlled by, or is under common control with the other employer.
On the other hand, if the employers are acting independently of each other and are disassociated with respect to the employment of the employee, then a joint employment relationship does not exist and each employer may disregard work performed by the employee for the other employer when meeting its FLSA obligations.
Examples given by the DOL:
- If an employee works for a restaurant franchised establishment owned by Mr. Smith for 30 hours a week, and then works 15 hours each week for a restaurant owned by Mrs. Jones, affiliated with the same franchise, they are not joint employers, because Mr. Smith and Mrs. Jones are not affiliated.
- But if the employee works interchangeably for two different franchise restaurants owned by Mr. Smith, which coordinate the employee’s schedule and agree upon his rate of pay – he is a joint employee of both restaurants. So, if he works 30 hours at one and 15 hours that week at another, he must be paid for 5 hours of overtime.
- An office park company hires a janitorial services company to clean the office park building after-hours. According to a contractual agreement between the office park and the janitorial company, the office park agrees to pay the janitorial company a fixed fee for these services and reserves the right to supervise the janitorial employees in their performance of those cleaning services. However, office park personnel do not set the janitorial employees’ pay rates or individual schedules and do not in fact supervise the workers’ performance of their work in any way. Under these facts, according to the new rules, the office park is NOT a joint employer of the janitorial employees, because it doesn’t hire or fire the employees, decide their rate or method of payment or exercise control over their conditions of employment.
BUT – PRACTICE TIP – although the DOL has given number three as an example of what is NOT a joint employer agreement, the reality is that if the janitor files a claim that he/she is a joint employee, it will be the office park company’s burden to show that it didn’t avail itself of its rights to supervise the janitors. If the janitor testifies that he was yelled by a company employee for not sweeping in the corners, and then fired, the company will have to go through litigation to try to prove that it isn’t a joint employer – so the company would be better off putting in the contract that they don’t have the right to supervise the employees – and making it a clear independent contract.
While the DOL has said that the purpose of setting forth the rules is to clarify joint employers, I suspect that it will create more litigation in the short term, until there is judicial interpretation of the rules. While the new rules intend to make it more difficult for employees to hold companies liable under the FLSA for minimum wage and overtime violations by staffing agencies, franchisees and subcontractors
If you are a franchisor, franchisee, use a staffing agency or use subcontractors, you’re your contracts reviewed to ensure that you are not unintentionally creating a joint employer relationship. If you own more than one company that shares employees, review your pay policies, and seek assistance to ensure that you are not creating FLSA overtime liability, and that your company is in compliance with the new rules.
The effective date of the new rule is March 16, 2020.